Jeffrey, I've been trading options for a while now. Made some $ and lost some. To your first question about Dell 90s: If you plan on holding the call options until expiration or close to it, then you have to be convinced that Dell's stock price will be above 91 1/2 in slightly over a month in order for you to come out ahead. For me, the time period is too short and the risk is much too great that it won't occur. As to the likelihood that Dell will hit this target by the end of the third week in Feb, Dell is trading at record highs now as is the market. The January effect notwithstanding, you have to believe that Dell will rise another 15% or so in order to make $ on this position. That Dell has routinely done that in the past doesn't necessarily mean it will do that in the next 30 days.
My best overall experience has been with at or in the money options with an expiration date relatively far out (e.g. LEAPS). The cost of the option is much greater because of the time value, but that notwithstanding, (1) it gives your position time to recover from an untoward movement in the stock price and (2) if you don't intend to hold until expiration, you are still going get the unused time value of the option back. (This strategy saved my tush a while ago with TXN) The only downside is that with options that are less heavily traded (e.g. those further out), the spread between bid and ask can be a little more, but unless you are considering day trades (a recipe for disaster in my opinion with options), that shouldn't be a factor.
If it were me and if I were going to take a position with Dell, it would probably be for Jan 2000 80s at (DLEAP) at 20 1/2 or even Jan 2001 80s (ZDEAP) at 28 1/2. Maybe even 70s at 25 1/2 and 33 respectively. The premium difference between 70s and 80s is 5 points giving me 10 points of intrinsic value. A pretty good trade overall. OTOH, the premium difference of 4 points between 80s and 90s requires a 10 point rise in the stock in order to be whole.... Something in my opinion for you to consider.
By way of example:
(Dell is trading at around 80 right now)
The option price for Feb Dell 90s is 2 7/16. To be whole at expiration, Dell stock would need to rise to 92 7/16 or beyond. A 15% increase in roughly 40 days - or .00375 per day.
The option price for August Dell 90s is 11 3/8. To get whole, Dell stock would need to rise to 101 3/8. A 25% increase in 180 days - .00138 per day.
January 90s: 16 3/8. Break even at expiration: 106 3/8. 32% increase in a year. .0009 per day.
Beyond the safety aspect of time, if your horizon is long enough, (e.g. greater than a year), and if you have a good expectation that you will have a position with Dell for that entire period, remember that anything held for over 12 months has a different capital gains rate than a short term holding.
The reason I stay away from out of the money options frankly, has (remember this is my own opinion) to do with the three general factors that make up an option's premium. They are (1) the intrinsic value of the option (whether it is in the money or not), (2) the volatility of the underlying issue and (3) the time value of the option. My observation is that the closer an option is to being in the money (or the deeper in the money an option is), the less the volatility factor is in determining the option price. What this means, frankly, is that the less an option is out of the money, the more reasonable the price is compared to the intrinsic value component. See the examples above. Again, a safety aspect that I happen to like.
The long and short of it is that the three reasons I wouldn't buy Feb Dell 90s is that they are too far out of the money, the time period is too short, and both the market and dell are trading at or near record levels. You may make money. I wouldn't bet on it (but then again, I'm often wrong).
As for brokers, with which I'm familiar require you to (1) claim reasonable expertise with options and to (2) sign away a lot of recourse, and of course, to (3) maintain a reasonable balance. As it goes, I'm a Schwab customer and am not unhappy with them. They do what I want - which is to execute orders quickly and at reasonable cost. |
